Money
& Investing 
Get Some “Elbow Room” and Chances Are You Will Score in the Market
Give a great athlete, such as Kobe Bryant in basketball or Tiger Woods in golf, a slight edge, and he or she will, more often than not, come out the winner.
In a way, that same principle -- getting a slight edge -- works in the world of stock investing. Getting some “elbow room” when initiating a new investment will, often times, be the key to getting it to turn into a winning trade -- and, possibly, a big score.
I once spoke with one top investor, and he had this pearl of advice: “In order to sell (a stock) right, you have to buy it right.” Knowing how to buy right solves a lot of problems.
So, how do you buy right and get that edge?
Well, the answer, of course, is to back test and analyze your trading style so that you know the “setup” that has the highest probability to turn into a successful trade. You also need discipline to hold back from low percentage plays within your system.
Almost all top notch investors have a particular style that they stick with. They get to know its strengths and weaknesses -- just as a basketball player knows his or her sweet spot for when to shoot and when to pass.
There are a variety of ways to develop a style. Often, it is best to develop a trading style that suits your temperament. Do you tend to be aggressive? Then, perhaps, a momentum style of investing will suit you. Are you conservative? Well, then, a value or bargain hunting style may be your thing.
In any case, you want to learn to be comfortable with your investment approach. Of course, there are those who are confident in their knowledge and who can switch to different styles, depending on market conditions, such as a trending market or a trading range market.
eSignal has a back testing program that can be found under the “Tools" heading. If you take the time to learn to use it, it could be a great aid in improving a trading style, especially if you make use of technical indicators.
Of course, technical analysis can be augmented by pre-filtering for certain stocks, based on their fundamentals or any other parameters that you may choose.
There is an old cliché in sports: “Timing is everything.”
That can also pertain to stock investing.
Usually, if your trade starts to make money right after you put it on, often times, there is a good chance you are on the right track. If a trade starts to go “under water” soon after you initiate it, chances are, you could get into trouble. That is a danger signal.
One popular method of investing is to select the stock of a company with a strong earnings outlook that is possibly part of a strong industry. The second step is to time the buy when the stock emerges from a basing pattern of at least five weeks after it has already demonstrated an up trend. The goal is to achieve a gain of 20 to 25 percent within a few weeks and, then, possibly see it blossom into a significant winner.
The key to this momentum style of investing is that, when the stock breaks out of the base, it should begin to pick up price momentum and start to move higher right away. If it does not, you need to recognize that quickly and exit. One must be quick to sell a stock that is not working.
The trick to getting elbow room with this momentum style is to do your homework:
- Filter your stock selection to include only strong earnings firms.
- Technically screen those stocks for base formations.
- Find the top of the base for those stocks (breakpoint).
- Pick those stocks you plan to buy.
- Enter your trade on the stock extremely close to the breakpoint.
- If the trade fails to hold above the breakpoint after entering, exit immediately.
- If it does hold, look for a follow-through to the upside.
One example of a stock that fit this momentum style and worked nicely was Diamond Offshore Drilling Inc. (DO), which broke out on December 6 at 118.60 and, in just 15 days, hit 148.50 for a nice gain of 30 points, or 25 percent. (see chart).
Another example is Ultralife Batteries Inc. (ULBI), which broke out from a flat base with a breakpoint at 14.60. It broke out December 18, and, in six days, raced to 19.57 for a 34 percent gain. Biomarin Pharmaceutical Inc. (BMRN) broke out December 13 at 29.16. It shot ahead to 35.29 in a few days for a 21 percent return.
Of course, you can use other styles and tools to buy and sell stocks. The stochastic oscillator and commodity channel index are two very good tools that give good entry points, when used properly. Often, a good back testing program on an individual stock will help you find the optimal cycle setting that could work the best for an individual stock using these indicators. (All of these tools are available in your eSignal application.)
Always remember to do your research and be confident in your execution of a trade. Do not hesitate when entering a trade. Try to build confidence in your system. Afterwards, you should review your trade to learn from any mistakes or to gain new ideas.
The secret to the success of many top athletes is good practice and the building of confidence. See yourself as an “investing athlete” and seek to develop the same traits.
Mr. Fasciocco’s is publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several national publications. To get a free trial temporary subscription to the Ticker Tape Digest Pro Report, which comes out daily with a stock market video show, go to www.tickertapedigest.com and insert username: freetrial and password: stocks. Mr. Fasciocco can be reached at: leo2@tickertapedigest.com
